Very interesting report from deal advisor Freeman & Co this morning, reporting 50 asset manager acquisitions globally in 1H15. The advisory firm notes an increase in mid-size deals relative to last year. “Deals involving firms with $1-10 billion in AUM, experienced a notable increase during 1H 2015 with 30 deals announced year-to-date, a 20% increase from 25 in 1H 2014.” See attached news release from Freeman & Co. LLC for further trend analysis and let us know if we can help your firm prepare to participate in a future transaction.

The SEC Office of Compliance Inspections and Examinations (“OCIE” or the “Staff”) recently released its 2015 Exam Priorities. OCIE examines all types of SEC registrants, including investment advisers, broker-dealers, investment companies, municipal advisors and transfer agents. Each January, the release of the OCIE Exam Priorities provides a useful guide and reminder to registrants in connection with their individual compliance program and risk management reviews for the year ahead.

Exam Priorities are always a reflection of current trends and news and, in recent years, also reflect the SEC’s expanded capabilities for monitoring market activity through data analytics. They are not exclusive—actual exams may, and will, cover other topics.

Pursuant to Article 67 of the Directive 2011/61/EU on Alternative Investment Fund Managers (“AIFMD”), the European Securities and Markets Authority (“ESMA”) has until 22nd July 2015 to issue to the European Parliament, the Council and the Commission:

(a) an opinion on the functioning of the passport for EU Alternative Investment Fund Managers (“AIFMs”) pursuant to Article 32 and 33 of the AIFMD and on the functioning of the national private placement regimes set out in Article 36 and 42 of the AIFMD; and

(b) an advice on the application of the passport to non-EU AIFMs and Alternative Investment Funds (“AIFs”) in accordance with the rules set out in Article 35 and Articles 37 to 41 of the AIFMD.

In order to form its response, on 7 November 2014 ESMA issued a ‘call for evidence’ concerning:

(a) the functioning of the EU passport under the AIFMD; and

(b) the functioning of (i) the marketing of non-EU AIFs by EU AIFMs in the EU; and (ii) the management and/or marketing of AIFs by non-EU AIFMs in the EU.

In order to issue positive advice, ESMA should be convinced that “no significant obstacles regarding investor protection, market disruption, competition and the monitoring of systematic risk” impede the application of the passport to the marketing of non-EU AIFs by EU AIFMs in the Member States and the management and/or marketing of AIFs by non-EU AIFMs in the Member States.

Should ESMA’s response be positive, the European Commission will then be required to set a date by which the extension of the EU passport to non-EU AIFs and non-EU AIFMs will become applicable in all Member States.

Currently only AIFMs with registered offices in EU Member States can be authorised as an AIFM and only EU authorised AIFMs can market EU AIFs to professional investors in any Member State in the European Economic Area under the EU “passport”. The marketing of non-EU AIFs by EU-AIFMs and the marketing of AIFs by non-EU AIFMs is currently subject to national private placement regimes, which may include additional rules imposed by any Member State where the AIF is marketed.

“EEA-AIFM”, managers established in the European Economic Area (“EEA”); and

“non-EEA AIFM”, managers not established in the EEA who market an alternative investment fund (or “AIF”) into the EEA

AIFM that are authorised by the UK Financial Conduct Authority (or “FCA”) are already subject to compulsory reporting, while non-EEA AIFM become subject to FCA reporting when they register with the FCA under the UK national private placement regime (the “UK NPPR”).

Non-EU AIFS – Calculating AUM

Small non-EEA AIFM under the UK NPPR report annually while above-threshold non-EEA AIFM determine their reporting frequency (the most regular being quarterly) by reference to their AUM calculated in accordance with the criteria set out at Chapter 16.18.4 of the FCA Supervision Manual.

For a non-EU AIFM managing non-EU AIFs, the AUM is the sum of the AUMs of all non-EU AIFs that the non-EEA AIFM is marketing in the EEA, as opposed to all of the non-EU AIFs managed by it.

Feeder Funds

In October, ESMA Guidance clarified that a non-EEA AIFM marketing a non-EEA feeder fund is required to report in respect of that feeder fund only where the non-EEA master fund is managed by the same AIFM and is not being marketed. Please note that the FCA reserves the right to contact the non-EEA AIFM to request additional information on the master fund.

GABRIEL

AIFMD reporting is now live under the FCA Gabriel (Gathering Better Regulatory Information Electronically) reporting system.

Please note that most non-EEA AIFM will need to submit their initial report by 1 February 2015 and that, at the time of writing this blog, the FCA will only accept AIFMD reporting using XML v1.1.

Non-EEA AIFM who intend to register or have registered under the UK NPPR should therefore ensure that they have procedures in place to capture the data required to satisfy their AIFMD reporting obligations.

Please contact your usual Reed Smith Investment Funds or Regulatory Team contact if you wish to discuss this topic.

This post was authored by Winston Penhall, Editor of this blog and partner in the Investment Funds practice of Reed Smith LLP, London.

We are frequently asked by non-EU managers broadly what their options are in relation to AIFMD compliance and fund marketing. We have therefore prepared a Client Alert specifically dealing with this hot topic which we feel should be distributed more widely.

Click here for our AIFMD Client Alert which we urge non-EU authorised managers to read now given the compliance date of 22 July 2014.

The AIFMD trigger date occurred on 22 July this year, with a 12-month transitional period (TP) in place in the UK for (i) existing UK managers of AIFs (UK AIFMs), and (ii) non-EU managers of AIFs (Non-EU AIFMs) actively marketed in the UK prior to the trigger date.

UK AIFMs The TP is currently in place for existing UK AIFMs, but those caught by the AIFMD should use this time to get ready for 22 July 2014. Amongst other things, a decision needs to be taken as to when the UK AIFM should apply for a variation of permission (VOP) to manage AIFs. The Financial Conduct Authority (FCA) wants applications from UK AIFMs to be submitted by January 2014. If a firm is not ready for full implementation of the AIFMD, or the passport is not required immediately, the VOP should make it clear that the variation is required to be effective on 22nd July 2014, because without this, technically the AIFMD will apply in full from the date the VOP is granted. The upside is that once the permission has been granted, the passport will be available in other member states. We can assist with the drafting of the VOP.

On August 29, 2012, the SEC issued proposed rules to implement Congress’ mandate, under the Jumpstart Our Business Startups Act (the “JOBS Act”), that the agency eliminate the existing ban on use of general solicitation and/or general advertising for Rule 506 and Rule 144A offerings. The proposed amendments, if adopted as proposed, would significantly impact the marketing of all private issuers.

Click here for a discussion of the SEC proposed rules under the JOBS Act by Reed Smith partners Alexandra Poe, Gerard DiFiore and Eulalia Mack.

Click here for a discussion by Reed Smith partners Dale Gabbert and Jacqui Hatfield, together with the Funds Europe Editorial, on the issues a eurozone break-up would present for fund managers. Dale and Jacqui identify the levels at which a fund manager needs to analyse risk, including entity risk and service provider risk.

This article was published in the October edition of the Funds Europe magazine.

A recent case serves as a useful reminder that careful consideration should be given to what happens in practice when considering whether arrangements amount to a collective investment scheme, irrespective of the wording of the relevant contractual documentation.

Although the case of Brown v InnovatorOne did not contain any new insight into the application of FSMA, it highlighted the danger of relying purely on contractual documentation when seeking to avoid classification as a collective investment scheme. This case challenged the validity of a failed tax relief scheme and in turn, considered whether the arrangements constituted by the scheme amounted to a CIS. Section 235(2) of FSMA underpins the crux of the issue whereby if the participants have no day to day control of the investments then they will constitute a CIS.

Reliance was asserted upon the contractual documentation in this case, in that the participants were given the right to control in accordance with their terms. However, it was found that in practice they did not assert such rights sufficiently to be regarded as being in effective control. The point to take away here is that the contractual documentation in itself will not be enough; there needs to be substantial evidence of practical exercise of control to avoid CIS classification.

In this case there had been a clear breach of the general prohibition under section 19 of FSMA. A scheme had been established without the requisite FSA authorisation.

There was also no doubt that the arrangements involved regulated activities and specified investments for the purposes of the financial promotion regime, therefore the judge found that the financial promotion restriction under section 21 of FSMA had also been breached. Not only did the judge not agree with the argument that the restriction did not apply because the promotions were made through IFAs, there was a mistaken assumption that the article 48 Financial Promotion Order exemption for marketing to high net worth individuals could be relied upon. Caution should be exercised when using this exemption as it does not apply to communications in respect of an investment in units in a collective investment scheme (other than one which invests wholly or predominantly in stocks and shares in an unlisted company or instruments acknowledging indebtedness in such a company). What’s more, even where that condition is satisfied, promoters must see the relevant certificate (signed 12 months prior to the communication) in advance to ensure that the recipient meets the requirements to be a certified high net worth individual under FSMA.

The UAE Securities and Commodities Authority (SCA) published the long awaited Investment Funds Regulations at the end of July. These regulations contain a number of new provisions, including in relation to the establishment of domestic funds in the UAE. However, of most interest to fund managers outside of the Emirates (including managers based in the DIFC) is likely to be the requirement for the SCA to approve all marketing of foreign funds in the UAE. This is a marked change from the previous tolerance of low-level, targeted marketing to institutions, including those in connection with existing client relationships.

The Regulations contain provisions regarding both public offerings and private placements, both of which require the prior approval of the SCA.

Public Offers

In order to conduct a public offer of a foreign fund in the UAE, that foreign fund must:

be subject to the supervision of an authority which is equivalent to the SCA in its home country; and

be authorised to make a public offering of units in its home jurisdiction.

The SCA may also impose additional conditions on public offerings (and has in relation to the use of local placement agents, below).

Private Placements

Of most interest (and possibly concern) to managers of hedge funds, private equity funds and real estate funds will be that:

all private placements of foreign funds (including to sovereign wealth funds) will now require the prior approval of the SCA; and

Under the new Regulations, all offerings of a foreign fund in the UAE (by way of a public offering or a private placement) must be made through a locally licensed placement agent. Placement agents can be banks and investment companies regulated by the UAE Central Bank or companies licensed by the SCA to undertake such business. Private placements may also be made through a local unregulated representative office of the fund, provided that the offer is limited to institutional investors and the relevant minimum subscription amount is not less than AED 10 million. Local private placement agents will be under certain obligations, including to take all necessary care in selecting foreign funds to be promoted and following up the performance of funds after the promotion.

These regulations appear to mark the end of the tolerated practice in the UAE of selected marketing to institutional investors, and is likely to require foreign fund managers and those operating in the DIFC to vary their practice. In addition, the attractiveness of having a DIFC presence may not be as strong as it was previously for fund managers, given that DIFC funds will be classified as foreign funds for the purposes of the new Regulations, and marketing of offshore funds even via the DIFC will require the prior approval of the SCA. It remains to be seen how these regulations affect the growth of the DIFC as a funds centre, but we would expect fund managers to now be considering establishing offices within the UAE (either in addition to or at the detriment of their current DIFC offices) in order to avoid the need to engage local placement agents.